Mandatory Paid Sick Leave Need Not Cut Workers' Pay

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Legislation that the new 111th Congress will likely debate early
in its first session would require employers to provide their
employees with at least seven days of paid sick leave a year.
Though intended to help employees, this proposal would reduce many
workers' pay. It raises benefit costs for the few businesses that
do not already provide paid sick leave, and these companies would
respond to such increased costs by reducing wages. The legislation
forces workers to take part of their earnings as paid sick
leave-whether they want to or not.

A simple modification would correct this unintended result:
Congress should both permit and require employers to allow
employees to cash out their paid sick leave benefits as they
accrue. This modification would give all workers access to paid
sick leave without requiring employees to take a pay cut.

The Healthy Families Act requires businesses to provide
full-time employees with at least seven days of paid sick leave a
year. The vast majority (86 percent) of full-time workers already
have paid leave they can take when they fall ill.[1] Workers at larger businesses have modestly
greater access to paid leave than workers at smaller firms, but in
every sector of the economy the vast majority of workers have
access to paid leave.[2]

Members of Congress support the HFA to help the minority of
workers without sick leave balance their work and family lives. No
one wants workers to face a choice between coming to work sick or
losing their jobs. However, as written, the HFA will force many
employees to take a pay cut.

Mandated Benefits Come Out of
Paychecks

When the government requires businesses to provide employees
with specific benefits such as paid sick leave, companies comply
with the law. However, little of this cost comes out of profits.
Employers care about the total compensation they pay their workers,
not the division of that compensation between wages and benefits.
Numerous academic studies show that employers respond to mandated
benefits by providing the benefit and reducing wages by an
offsetting amount.[3]

The average employee in 2008 earned $0.31 per hour in sick leave
benefits and $2.03 per hour in all forms of paid time off.[4] Sick leave is a benefit that costs
employers money. If Congress makes paid sick leave mandatory,
companies will respond by cutting workers' pay by approximately the
cost of providing the sick leave. Indeed, history has already
demonstrated that companies respond to the higher benefit costs by
lowering wages: When Congress required employer-sponsored health
insurance plans to cover maternity care, employers offset this new
cost by cutting employee pay.[5] Ultimately, paid sick leave comes out of
workers' paychecks.

Less Choice for Workers

The Healthy Families Act would not increase workers' total
compensation. Rather, it would require workers to take less of
their compensation as cash wages and more as time off, whether they
want to or not. Some workers would gladly make this trade; others
would lose out. Many healthy workers who rarely fall sick would
rather not take a pay cut to fund sick leave they will probably not
use. Other workers cannot afford to take a pay cut in these current
economic conditions. By forcing workers at companies without paid
sick leave to take a pay cut, mandatory paid sick leave legislation
gives employees fewer choices and less control.

As former Treasury Secretary Larry Summers observed, mandated
benefits have many of the same labor market effects as raising
taxes on workers.[6] Therefore, Congress should not raise taxes
on workers during the middle of a steep economic downturn.

Allow Workers to Cash Out Sick
Leave

Members of Congress understandably want workers to have the
flexibility to take time off work when they or a family member are
ill. Few Members of Congress want to force workers to take a pay
cut. A simple provision would accomplish both these goals.

Congress should require any company that provides the minimum
mandatory paid sick leave benefits to allow its workers to cash
out, at their request, paid sick leave benefits as they accrue.
Under such a system, workers would still have the flexibility to
take paid sick leave when they need it. However, Congress would not
force workers to take a pay cut. Instead, this provision would
grant any worker the option of taking their paid sick leave
benefits in cash, thereby getting back the earnings they would lose
with their pay cut.

Requiring companies to allow workers to cash out their sick
leave benefits would give workers, instead of Congress or
companies, control over how they receive their compensation. It
would enable workers who need it to take paid sick leave without
forcing healthy employees or employees who cannot afford lower
wages to take a pay cut.

Recommendations to Congress

More than four-fifths of employers provide paid leave benefits
their employees can take when they are ill. Many in Congress want
to ensure that workers employed by the minority of firms that do
not offer paid sick leave can take time off work when sick without
jeopardizing their jobs. This is understandable. However, mandatory
paid sick leave legislation would force workers to take a pay cut,
as companies would respond to the higher benefit costs by lowering
wages. Workers' total compensation would remain unchanged, but they
would be forced to take more of their earnings as paid leave.
Congress should not force workers to take a pay cut. Instead,
Congress should give workers control over their earnings. If
Congress passes mandatory paid sick leave legislation, Congress
should give workers the right to cash out their paid sick leave
benefits as they accrue.

James Sherk is Bradley
Fellow in Labor Policy in the Center for Data Analysis at The
Heritage Foundation.

[6] Lawrence Summers, "Some Simple Economics of
Mandated benefits," American Economic Review, Vol. 79, No. 2
(May 1989), pp.177-83. Summers demonstrated that mandated benefits
act like a tax on workers equivalent to the difference between the
cost to employers of providing a benefit and the value workers
attach to that benefit.